The global handset market is undergoing a fundamental change, a change that likely will dominate the industry throughout the decade.

For one thing, mobile phone shipments continue to rise dramatically even as subscriber growth slows in established markets. The growing sales come from a combination of new markets in developing countries as well as increasing sales of replacement handsets.

And the consumers' brief dalliance with the "all-in-one" phone, if it existed at all, is giving way to market segmentation as handsets seek to excel at specific tasks. More phones are designed to take high-quality photos, act as music players or view TV and video.

Growth Curve Analysts expect the final tally on handset sales in 2005 to reach about 800 million, a 19-percent increase over the year before. (Nokia is more conservative with its estimate of 780 million.) That growth curve likely will slow slightly in 2006 as market penetration increases, but analysts still see a strong increase with between 850 million and 900 million handsets expected to be sold this year. Merrill Lynch has forecast that global handset shipments will surpass 1 billion in 2008, driven especially by growth in India, China and North America.

The replacement market for handsets is expected to be 58 percent of the total global market for 2005 and is expected to increase to 65 percent in 2006, according to Lehman Brothers.

Emerging markets are buying more phones, most of them low-end, first-time handsets. Lehman says Eastern Europe saw the most rapid growth in handset sales in 2005, up 26.1 percent, while Africa saw 25.6 percent growth, Asia/Pacific 24 percent, Latin America 23 percent and the Middle East 20.9 percent.

Another growth area is cameraphones, which accounted for 38 percent of the handsets sold in 2005, or 295.5 million units, according to Gartner. That's up from 14 percent of the phones in 2004. IDC says three-fourths of all handsets sold will have cameras in 2009. European sales of cameraphones were particularly strong, with 55 percent of the total market in 2005.

Another trend for handset manufacturers is the increased use of memory, which shows how much cell phones are becoming like mini-computers to store music, photographs and other data. This trend shows up mostly in replacement phones as people buy new models that will do more things. Lehman says memory makes up 24 percent of the total cost of a W-CDMA handset, slightly more than the telecommunications capabilities in the transceiver chipsets.

In the past year, handset manufacturers increasingly have focused on low-end handsets for the emerging markets. Last year at the 3GSM World Congress in Cannes, France, Motorola launched its "emerging markets phone" under an agreement with the GSM Association, using a high-volume approach following a collective set of specifications. Motorola sought to bring the price of a handset under $40.

Nokia also recently unveiled low-priced phones for emerging markets. The Finnish manufacturer says it believes operators in emerging markets will be able to take advantage of the low-cost phones to offer monthly service at a price as low as $5.

The market research company Ovum says these low-cost phones actually could affect OEM handset sales in developed markets. People in emerging countries could buy the $40 handsets and then resell them in other, developed, GSM markets, assuming the frequencies matched, Ovum says.

Hear the Music At the other end of the spectrum are the handsets coming out that target specific consumer behaviors, such as music. Music phones represented 20 percent of the handset market in 2005, according to IDC, with that market segment expected to reach two-thirds of all phones sold in 2009.

The world's No. 1 cell phone manufacturer, Nokia, is among the biggest advocates of this trend, with handsets under its Nseries brand designed for optimal photography, music and TV, plus its first handset without a cellular radio, the 770 Internet Tablet. Nokia's segmented approach resulted in 56 new models in 2005, compared to 36 the prior year.

Nigel Rundstrom, head of Nokia's multimedia handset unit, says the company has identified areas of strong consumer behavior, like music, TV, photography and gaming, for which it will target handsets.

"We're looking at the core consumer behaviors, where people spend their time and money, and what products they use," Rundstrom says. "There are four or five key ones in the consumer space, and then more for the enterprise. We want to connect people to their passions. That is our mantra."

The N90 was the first in the Nseries to launch. It's a 2-megapixel cameraphone with Carl Zeiss optics, flash, macro-mode for close-ups and video recording. It went on sale in the United States in November through online and retail outlets. The N91 music phone, which has a 4 gigabyte hard drive, will start selling this winter, and the N92 TV handset will launch later in the year.

The N92 is built for digital video broadcast-handheld (DVB-H) technology, which enables TV signals to the handset on spectrum separate from the cellular network. It's expected to be shown off for the World Cup soccer games in Germany in June.

Despite reports of the death of Nokia's gaming platform, the N-Gage, Rundstrom says the company hasn't given up on it. Rather, the N-Gage gaming technology will be used in some Nokia Series 60 handsets in 2006. He didn't comment on whether the company has plans for another N-Gage model despite poor sales of the first two.

"Gaming is part of consumer behavior that is very strong and it's only a question of the right solution for the opportunity," Rundstrom says. "There's no way we can ignore that opportunity."

Rundstrom believes the trend for 2006 will be more handsets with Wi-Fi access, using it initially for Internet access but later for voice over IP. Nokia isn't expecting mass sales of the 770 Internet Tablet in 2006 but sees the category as potentially gaining steam in years ahead.

Motorola's Edge While Nokia sells about one-third of the handsets globally, the market leader in the United States is Motorola, which sells about 30 percent of the handsets in North America. Motorola had the runaway favorite handset in 2005 with the RAZR V3. Motorola has earned its reputation for its designs, and the RAZR is no exception, as the company hasn't been able to keep up with demand – 12.5 million were sold in the first three quarters of 2005.

The question is whether coming handsets will ring up the same kind of enthusiasm. Motorola's slim candy-bar SLVR and soft-edged PEBL handsets recently started selling in limited quantities, so it's too early to determine whether they will be met with the same excitement. One coming handset, the Motorola Q, has been generating a lot of attention. The Q, a razor-thin handset that runs Microsoft's Windows Mobile 5.0 software and has a QWERTY keyboard, is due in stores in the first quarter.

James Burke, senior director of product development for Motorola, promises the company will continue with more handsets "that make a difference in the market," like the RAZR. He predicts the SLVR will have the same kind of impact in some parts of the world, like Europe, that like that form factor.

"The SLVR and Q are plays on the RAZR platform," he says. "The RAZR was not a one-off. It was very thoughtfully done and with a determined focus. You'll see additional big developments like that; not every quarter but more of that kind."

Burke says handsets have the ability, with annual sales what they are, to transform other industries. That will happen with music, he says, as well as other categories like TV. Motorola's first music-optimized handset, the ROKR iTunes phone, hasn't taken the music world by storm, but Burke says it will continue to evolve over the next couple of product cycles. Motorola will continue to emphasize music-optimized handsets, both in conjunction with Apple and otherwise, he says.

Picture This New trends will continue. For instance, cameraphones have reached the level of quality that consumers are treating them as substitutes for digital cameras, says Muzib Khan, vice president of product management and engineering for Samsung. Samsung sells a phone in Korea that has a 7-megapixel camera, a higher resolution than most digital cameras.

"At some point, megapixels don't make a difference unless we have something to do with the photo," he says. "If we take a megapixel photo, do we have a way to send it to someone, to print it or to store it?"

Because of that, Khan foresees a trend in 2006 not only toward multi-megapixel cameraphones, but with added features on the handsets that make them converged devices. These include Bluetooth for printing or saving the photos on a PC. Somewhat in line with this will be phones capable of video on demand.

Music, including music on demand, also will be a big theme for handsets in 2006, Khan says, but will depend somewhat on how the market responds to the first handsets.

Samsung recently came out with its own "thin is in" phone, the MM-A900, an ultra-slim form factor to compete with the RAZR. That form factor will be another trend in handsets in 2006, along with "slider" phones, Khan says.

It all adds up to more choices for consumers in the years to come, especially as wireless phones become the primary phone for more people.

Handset Growth in 2006 and Beyond
Global Handset Shipments (millions)673.9801.0917.7981.21017.3
% YoY Growth28.4%18.9%14.6%6.9%3.7%
Replacement Demand Expected to Remain Strong
Replacement % Total54%58%66%70%75%
Source: Merrill Lynch